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Ask Jean Chatzky: How Do I Pay For The New Roof Over My Head?  

Jean Chatzky  |  September 17, 2020

A reader question: Is it better to pull money out of retirement accounts — in a year when there are no RMDs — or to borrow?

Q (Part 1) : I’m a 65-year-old widow and I need a new roof on my house which will be about $16,000. I’m unsure which account would be best to withdraw from without high tax implications. Can you advise? Here’s a look at where all my money is currently. I have monthly pension and Social Security income of $2,890 a month, as well as rental income of $850 a month. My expenses total about $3,200 a month. I have my own traditional IRA at $288,000, as well as an inherited IRA of $76,897, from which I have to take RMDs of about $2,500 a year, and an individual brokerage account with $20,500. I also have an emergency fund of about $13,000 in a high-yield go account. So, how should I pay for the roof over my head?

A: That’s a good question, particularly this year, because thanks to coronavirus, you actually don’t have to take RMDs — which stands for required minimum distributions — from your retirement accounts.

I am curious how the money in your traditional IRA and your inherited IRA are invested and how those investments have actually done during these times.  I hope that they’ve come roaring back with the markets.  But what I don’t want to see is you selling investments at a loss to pay for this, when you don’t really have to do that, because you have the money in this individual brokerage account that you’ve already paid taxes on.

My inclination would be that you should either pay for it A.) out of the taxable brokerage account (assuming your investments there have rebounded) or B.) look whether you can get a low interest rate home equity loan or home equity line of credit. You’d pay that loan off over time with the $500-ish you have each month that you’re not actually using.  (The money left over after your pension, Social Security and rental income minus your expenses.) 

Now, I do want to point out that lending requirements — particularly for home equity products — during COVID have gotten tougher. Wells Fargo and Chase aren’t making these loans. Some lenders are requiring more paperwork. If you can’t get a loan, do not sweat it. Really. Whatever funds you use to pay for this, whether you use the money in the individual brokerage account, or whether you use a combination of that money plus money that you decide that you are going to pull out in the form of required minimum distributions, just replenish it over time with the money that you’re not using from your monthly income. A roof is one of those things that just can’t wait.  

Q (Part 2):  Thankfully, I’m about to have some additional room in my budget due to savings from a home refinance and paying off my car loan. I’d like to take this money, which will be about $520 a month and add to my retirement. However, I’m unsure if I should put it in my Roth IRA, my 403b or some combination. I’m an educator, so I’m automatically contributing to a pension plan at 7.5%. I contribute to the match in an employee-sponsored 403b plan at 2.5%. And I have my Roth IRA outside of work, and I’ve been able to contribute a hundred dollars a month there. I currently make $72,000 a year and I have a very comfortable emergency fund. 

A:  When we look at the 403b (with matching dollars) and the pension plan that you contribute to automatically, you’re putting about 12.5% total into pre-tax savings. As long as you can afford to pay the taxes on these additional funds now, I’d put the excess into the Roth which you can fund up to $6,000 a month (unless you’re over 50, then you can put in an extra $1,000). That gives you some nice tax diversification. When you get to retirement, you’ll have a substantial pot of money (in the Roth) that’s already been taxed. Not having to pay taxes as you withdraw that money may allow you to breathe a little easier. 

Once you’ve maxxed out the Roth, if you want to put the money into the 403b, that’s fine. But I’d also think about whether you have other goals. Are you trying to pay off that home loan during a certain period of time before you get to retirement, for example? Or do you have goals as far as travel is concerned? And if you do, it’s okay to use some of that money to support those goals as well. Sometimes great savers like you (and sometimes me) get so laser focused on tomorrow, that we don’t give ourselves enough breathing space to live today.  

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